Students - HHL Leipzig Graduate School of Management

32 Research & Programs
Sparkassen-Finanzgruppe Chair of Macroeconomics
Outstanding HHL Diploma thesis about “Monetary policy of
the Fed and the ECB during the financial crisis”
The Federal Reserve and the European Central
Bank reacted to the financial crisis with an unprecedented
“policy of easy money” and several
unconventional measures. More and more people
are concerned that inflation might as a result
rise to unprecedentedly high levels once economic
growth accelerates again. In his Diploma
thesis, Phillip Rädle (K23) compares the measures
taken by both central banks during the
crisis and analyzed the consequences for their
HHL news talks with Professor Dr. Wilhelm
Althammer about “economic reasoning.”
HHL news: The main goal of your courses
at HHL is to promote the development of
rigorous economic reasoning. What exactly
is the meaning of this term and why should
today‘s manager know about it?
Professor Dr. Wilhelm Althammer:
Economic reasoning involves the scientific
method of economics, which uses abstract
(and often simple) models to understand and
explain how a complex real world operates.
This modeling approach forces you to
structure your thinking and to disclose your
assumptions. Students are sometimes
confused by the variety of models they can
choose from, and the art of economic
modeling is to decide which assumptions to
make and on which aspect of the problem
to focus. This method has an advantage: in
discussions about economic policy, problem
solutions are sometimes presented as if they
balance sheets. He concludes that differences in
the measures taken can be attributed predominantly
to different monetary instruments – the
monetary instruments of the Fed may in part be
“outdated.” The Fed’s balance sheet worsened
with its immense buying of illiquid assets. Exiting
the policy of monetary easing may be much
more difficult for the Fed than for the ECB. Consequently,
inflation risks in the U.S. may be higher
than in the Euro area if the exit is not success-
Interview What changing incentives changes
were the one and only solution – the
model-based approach shows that there are
always certain assumptions which drive
results, and these should be disclosed.
HHL news: Could you please give a
current example?
Professor Dr. Wilhelm Althammer: There is
a fine example from my lecture in tax policy.
If you follow the discussion on tax reforms
and tax reductions, the hope is often
expressed that lower taxes might have a
positive effect on tax revenues by changing
incentives, the so-called Laffer Effect. Of
course, this hope allows painful cuts in
expenditure to be avoided or the announcement
of an increase in public debt to be
averted. In a model analysis, the critical
elasticities can be identified, and comparing
these elasticities with empirical estimates
shows that a Laffer Effect will only happen at
marginal tax rates that are far beyond the
actual tax rates. Therefore, any decrease in
tax rates will unambiguously decrease tax
revenues.
HHL news: What are the main challenges
of today’s international financial system?
Professor Dr. Wilhelm Althammer:
The governments of the major industrial
countries have avoided a meltdown of the
financial system by intervening massively in
financial markets and by flooding the
markets with liquidity. I see two main
challenges for monetary policy and for
HHL News – wiNter 2009/2010
ful. Whether the exit is successful or not will
largely depend on the effectiveness of the available
instruments to reduce or at least control the
enormous growth in the liquidity of commercial
banks. The exceptional Diploma thesis by Phillip
Rädle shows a thorough analysis of the balance
sheets and a very strong link with the current
economic situation.
Oliver Hoßfeld
financial market regulation. Monetary policy
needs to find an exit option out of the
excess in liquidity, and to find it early enough
to avoid inflationary pressure yet late enough
not to disrupt the recovery of the economy.
In the field of financial market regulation, a
new international architecture has to be
found to handle the problem of systemic
risks in order to avoid the bankruptcy of
large banks and countries. In this field, I see
only minimal progress, and I have the feeling
that the political discussion isn’t focusing on
the right problems. It is not so much the
compensation of bank managers that has
caused the problems, it’s regulations that
neglected the fact that markets do not work
properly with asymmetric information, a
situation typical for financial markets.
HHL news: Students in your courses have
to solve a couple of quizzes. What are
they about?
Professor Dr. Wilhelm Althammer:
The quizzes are just the application of a
basic law of economic reasoning, namely
that people respond to incentives. Previously,
students started to learn the material in
my courses shortly before the exam, and
this was an inferior strategy. I introduced
quizzes containing simple multiple choice
questions on the topics of the last lecture to
give them incentives to work more continuously.
And it works: Even students in
courses where I did not intend to use
quizzes now ask for them.